July 2014 Industrial Production: A Bad Start To 3Q2014

Yikes (log annual and monthly changes; seasonally adjusted; 2000=100):

Bad doesn’t even come into it; how about depressing? While it could be said that most of the sudden stop in growth is coming from mining (read: oil & gas), growth numbers are off across all sub-indexes.

I half suspected something like this would happen, but not quite so drastically. There’s a fairly large base effect from last year (1H2013 was pretty bad), but the outsized growth of 2Q2014 fooled me. 2H2014 was always shaping up to show slower growth, but I didn’t expect quite this slow.

On the flip side, July was the month of Ramadhan where output tends to drop anyway. The August numbers won’t be too spiffing either, because August tends to be a slow month in terms of output and consumption across most advanced economies – it’s the last month of the summer, and most everyone is on holiday. That partially explains both the drop off in output as well as the lousy trade numbers that were released last Friday.

Based on yesterday’s release alone, we’re looking at just 4.4% growth for 3Q2014 (log annual changes; 2005 prices):

That’s well below consensus expectations. There won’t be much help from the fiscal side either, as it appears subsidy rationalisation is temporarily on hold, which means cutbacks in other spending are likely. There should be an acceleration in investment growth as some major projects pick up speed in 2H2014, which means that we’re (for the moment) back in the growth scenario for 2012-2013 – flat output and exports, with the economy supported by high capex.

One saving grace is that we’re not really seeing a structural break in growth (index numbers; seasonally adjusted; 2000=100):

Both manufacturing and electricity output suggest no break in the trend, rather it’s a pause in growth. I’d expect the peak export months of Sept-Nov (catering to the year-end holiday season) will see a pick up in E&E output and exports. That’s a reversal of the mental scenario I originally had in mind, with flatter growth in 3Q and stronger growth in 4Q rather than the other way around.

One last point: I’ve seen a few commentators gushing over the government’s “management” of the economy over the last few months. No doubt we’ll see a bit of finger pointing over the next few. The truth is that neither the praise nor the blame are fully or even mostly warranted. A lot of this growth volatility is coming from external rather than internal factors, a function of how open an economy Malaysia is.

Technical Notes:

July 2014 Industrial Production Index report from the Department of Statistics (warning: pdf link)